The U.S. pension risk transfer market is booming as more companies look to shed their pension liabilities, but changes to the rules governing such transactions could be coming, which is making some stakeholders nervous.
"What I worry about is that we see something proposed that disrupts the system that's working well," said Kent A. Mason, a Washington-based partner at law firm Davis & Harman LLP and outside counsel for the American Benefits Council.
"To me, where do you go from the toughest standard that there is — the safest available annuity standard?"
As required by SECURE 2.0, a retirement security package Congress passed in December, the Department of Labor's Employee Benefits Security Administration is currently reviewing its Interpretive Bulletin 95-1, guidance promulgated in 1995 that relates to the fiduciary standards under the Employee Retirement Income Security Act of 1974. IB 95-1 outlines the process plan fiduciaries must take when executing a pension risk transfer. Chiefly, the bulletin states that plan fiduciaries must take steps to obtain the safest annuity available unless, under the circumstances, it would be in the interest of the participants and beneficiaries to do otherwise, according to an EBSA report published in July.
Per SECURE 2.0, the department must submit a report to Congress by December outlining its findings and suggestions on IB 95-1.
As part of its review, department officials have been meeting with dozens of stakeholders on how IB 95-1 is currently working, how it could be improved, and whether there are any trends or developments in the pension risk transfer market that the department should consider, said Jeffrey J. Turner, deputy director in EBSA's office of regulations and interpretations, during a July 18 ERISA Advisory Council hearing. The council heard from department officials and various industry stakeholders at the hearing to assess the pension risk transfer market and offer its thoughts to the department.
Several stakeholders, including Mr. Mason, told the council that the PRT market is already safer than the pension system and doesn't need wholesale changes. In an interview, Mr. Mason said annuity holders who got their annuity through a pension risk transfer transaction have not lost a single dollar over the past 30 years, which cannot be said for pension plan participants.
"We have a situation where you've had zero losses, and if you make annuity contracts include additional provisions that don't fit in annuity contracts, all you're doing is adding costs, and if you add a lot of costs then fewer people are going to be able to do these pension risk transfers and get a safer annuity than they have in their pension plan," Mr. Mason said.
The council met again Aug. 29 to discuss the issue and considered a host of recommendations to the department. But after several votes, only one recommendation garnered majority support: The department should update IB 95-1 to expand on its existing language addressing how a fiduciary should consider an annuity provider's administrative capabilities and experience.Following the vote, Mr. Mason said that issue is covered in IB 95-1 and fiduciaries already take it into account. But he noted that the department will make its own recommendations to Congress and, possibly without discussing it with the council beforehand, may go beyond what the council advised.